Sunoco 2008 Annual Report Download - page 95

million after-tax loss in other income, net, in the 2006 consolidated statement of income in connection with this
transaction. As a result, such third-party investor is no longer entitled to any preferential or residual return in this
operation.
The returns of the investors in the Indiana Harbor cokemaking operations were equal to 98 percent of the
cash flows and tax benefits from such cokemaking operations during the preferential return period, which
continued until the fourth quarter of 2007 (at which time the investor entitled to the preferential return recovered
its investment and achieved a cumulative annual after-tax return of approximately 10 percent). Those investors
are now entitled to a minority interest amounting to 34 percent of the partnership’s net income, which declines to
10 percent by 2038.
The following table sets forth the minority interest balances and the changes in these balances attributable to
the third-party investors’ interests in cokemaking operations (in millions of dollars):
2008 2007 2006
Balance at beginning of year ................................. $83 $102 $234
Nonconventional fuel credit and other tax benefits (Note 1) ......... — (3) (45)
Preferential return (Note 1) ................................... — 20 48
Minority interest share of income (Note 1) ....................... 19 — —
Cash distributions to third-party investors ....................... (31) (36) (43)
Acquisition of third-party investor’s interest in Jewell
cokemaking operations (Note 2) ............................. — — (92)
Balance at end of year ................................... $71 $ 83 $102
The Company indemnifies the third-party investors (including a former investor in Sunoco’s Jewell
cokemaking operations) for certain tax benefits that were available to them during the preferential return period
in the event the Internal Revenue Service disallows the tax deductions and benefits allocated to the third parties.
These tax indemnifications are in effect until the applicable tax returns are no longer subject to Internal Revenue
Service review. Although the Company believes the possibility is remote that it will be required to do so, at
December 31, 2008, the maximum potential payment under these tax indemnifications would have been
approximately $180 million.
Logistics Operations
In 2006, Sunoco Logistics Partners L.P. issued 2.7 million limited partnership units in a public offering,
generating $110 million of net proceeds. Upon completion of this transaction, Sunoco’s interest in the
Partnership, including its 2 percent general partnership interest, decreased to 43 percent. Sunoco’s general
partnership interest also includes incentive distribution rights, which provide Sunoco, as the general partner, up
to 50 percent of the Partnership’s incremental cash flow. The accounts of the Partnership continue to be included
in Sunoco’s consolidated financial statements.
The Partnership’s prior issuance of common units to the public resulted in an increase in the value of
Sunoco’s proportionate share of the Partnership’s equity as the issuance price per unit exceeded Sunoco’s
carrying amount per unit at the time of issuance. Prior to the conversion of Sunoco’s remaining subordinated
units to common units in February 2007, the resultant gain to Sunoco on the prior issuance of common units to
the public had been deferred as a component of minority interest in the Company’s consolidated balance sheets
as the common units issued did not represent residual interests in the Partnership due to Sunoco’s ownership of
the subordinated units. A deferred gain of $151 million ($90 million after tax) was recognized in income in 2007
when Sunoco’s remaining subordinated units converted to common units at which time the common units
became residual interests. An additional $23 million ($14 million after tax) was recognized in income in 2008
attributable to a correction of an error in the computation of the gain that was recorded in 2007. The prior-period
amount has not been restated as this adjustment was not deemed to be material.
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